Consider the following two mutually exclusive projects: Year   Cash Flow (A)   Cash Flow (B) 0 –$ 491,000 –$ 92,000 1 114,000 52,000 2 134,000 36,000 3 79,000 33,500 4 474,000 28,600 Whichever project you choose, if any, you require a 15% return on your investment. What is the IRR for each project? (Round the final answers to 2 decimal places.)   If you apply the IRR criterion, which investment will you choose? Project A Project B What is the profitability index for each project? (Do not round intermediate calculation. Round the final answers to 3 decimal places.) Project A Project B If you apply the profitability index criterion, which investment will you choose? Project A Project B   Based on your answers in (a) through (e), which project will you finally choose? Project A Project B

Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter12: Capital Budgeting: Decision Criteria
Section: Chapter Questions
Problem 10P: Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year...
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Consider the following two mutually exclusive projects:

Year   Cash Flow (A)   Cash Flow (B)

0 –$ 491,000 –$ 92,000

1 114,000 52,000

2 134,000 36,000

3 79,000 33,500

4 474,000 28,600

Whichever project you choose, if any, you require a 15% return on your investment.

What is the IRR for each project? (Round the final answers to 2 decimal places.)

 

If you apply the IRR criterion, which investment will you choose?

Project A

Project B

What is the profitability index for each project? (Do not round intermediate calculation. Round the final answers to 3 decimal places.)

Project A

Project B

If you apply the profitability index criterion, which investment will you choose?

Project A

Project B

 

Based on your answers in (a) through (e), which project will you finally choose?

Project A

Project B

 

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